Since going through a three-year bankruptcy process, a lot of wonderful initiatives have taken place in Vallejo, California – a city of 118,000 people in the northern end of the San Francisco Bay. After the city’s police force was cut down over 300 community watch groups formed to protect neighborhoods. The city recently launched Nextdoor, a private social network platform for neighborhood communication. In the most substantial move, the city has established a first in the nation “Participatory Budgeting” process. It was described by a participant as:

Funded by $3.2 million dollars allotted by a citywide sales tax passed by Vallejoans while still in bankruptcy, the city of Vallejo embarked on Participatory Budgeting (PB), the first US city to ever try PB citywide. PB Vallejo garners ideas from its stakeholders and citizenry with the goal of funding proposals that benefit the public, are a one-time expenditure, and are implemented by the city of Vallejo or other approved public agencies and nonprofits.

Did the city residents take it up?

Over 600 people assembled together at meetings across the city and online at www.pbvallejo.org to come up with over 800 ideas and suggestions on the well-being of Vallejo. 100+ volunteer budget delegates have worked together and with city staff to flesh out those ideas into viable proposals. These proposals will go onto a ballot in May where the citizens of Vallejo, ages 16 and above, will vote on which plans will go forward to the city council to fund and implement this fiscal year. The budget delegates are now preparing for three planned expos in April where they will present the proposals that will be on the ballot so the voters of Vallejo can interact, ask questions and walk away with what they need to make an informed vote.

Kudos to Vellejo’s residents for their momentum and spirit in helping their bankrupt city. It shows superior initiative. But the structural fiscal problems, which the city could have addressed through the bankruptcy process and chose not to, remain. Even after spending an estimated $12 million on bankruptcy and legal fees, the city has fiscal problems. Standard & Poor’s Gabriel Petek led a cost benefit analysis on Vallejo’s bankruptcy and determined (emphasis mine):

We think that evaluating the city’s bankruptcy solely on its fiscal merits, therefore, renders an equivocal verdict. When indirect and long-term costs are added to the equation, based on our estimate, it becomes even less likely that the benefits of bankruptcy will come near the costs.

S&P explicitly identifies labor costs as a problem that was not adequately addressed within the bankruptcy process:

Probably the most substantial adjustment Vallejo obtained in bankruptcy was the ability to reject its labor contracts. But even here, aside from some short-term savings, it’s not clear to us that the bankruptcy will prove to have netted a benefit to the city’s fiscal position when considering the longer-term costs to the city and its economic effects. Furthermore, even after filing its bankruptcy petition, the city and its labor unions struggled to renegotiate contracts for 10 months before the bankruptcy judge, siding with the city, compelled a renegotiation.

Sure enough, in the city’s proposed 2013/2014 budget, there are big structural imbalances that the city is hoping to eliminate by getting labor concessions. To reach a balanced budget it has put a $5.2 million placeholder (page 2) in the budget for givebacks it hopes to gain from employees, although the negotiating track record is poor. For example, here are the salaries and benefits for the eighth through 25th highest-paid Vallejo police officers in the upcoming budget (page J-32).

Vallejo did not challenge CalPERS in bankruptcy and did not lower their pension liabilities, nor did it achieve much wage savings. Vallejo, after its bankruptcy process, should be fiscally stable and running balanced budgets. Instead, pension costs are skyrocketing. The increase in community involvement is excellent, but it is the city government’s responsibility to wrestle the hard money issues to the ground. This includes wage and pension concessions. The tale of Vallejo should serve as a warning to Stockton and San Bernardino that high police and fire salaries are not sustainable and they must be addressed in bankruptcy court. These recurring deficits in Vallejo are not going to disappear on their own.